The Reserve Bank has taken an interest in digital currencies and monitors developments
in this area. Digital currencies represent an interesting development in the
payments and financial system landscape. The concept of a decentralised ledger
is an innovation with potentially broad applications for a modern economy.

At present, digital currencies are not widely used in Australia or in other developed
economies. While they do not constitute legal tender in Australia, there is
nothing to prevent two parties from agreeing to settle a payment using a digital
currency. Looking ahead, growth in the use of digital currencies will presumably
depend both on the evolution of digital currencies and distributed ledger technologies,
as well as the extent to which digital currencies can better meet the needs
of users than existing payment methods. One case where digital currencies might
gain traction is in the area of international remittances, which can be expensive
and subject to delays in the receipt of funds. More broadly, however, many
payment attributes of digital currencies are already available in the ‘traditional’
payments system – or will be available in the case of new services that
may be facilitated by the New Payments Platform project. Accordingly, it remains
to be seen what would drive their widespread use domestically, particularly
in light of the price volatility of digital currencies observed to date.

Given the very limited use and acceptance of digital currencies in Australia, digital
currencies do not currently raise any issues for the Bank in terms of the Bank's
monetary policy and financial stability mandates.

The Bank is also the principal regulator of the payments system. Our comments today
will focus on this aspect of the Bank's mandate. The Bank's approach
to the use of its regulatory powers under the Payment Systems
(Regulation) Act 1998 has generally been to rely on industry- or market-driven
solutions, only intervening when necessary on the grounds of its statutory
responsibility for efficiency and competition in the payments system and controlling
systemic risk. Digital currencies are not currently regulated by the Bank or
subject to regulatory oversight. However, the Bank will continue to monitor
the use of digital currencies. In the event that the use of a particular digital
currency was to grow significantly and to raise public interest concerns, the
Bank would consider whether it would be desirable and feasible to ‘designate’
it as subject to regulation and to then impose standards on participants in
that system. The Bank will also be assessing whether the regulatory framework
can accommodate alternative mediums of exchange such as digital currencies,
consistent with the observations of the final report of the Financial System
Inquiry.

At present, however, the Bank's judgement is that the current very limited use
of digital currencies means that they do not raise any significant concerns
with respect to competition, efficiency or risk to the financial system. Accordingly,
it is currently unlikely that any benefits of regulation would outweigh the
potential costs. In this regard, one has to be mindful of the risk of misinterpretation
of the degree of protection offered by regulation or oversight, which may lead
users to exercise less caution than warranted when selecting and using service
providers.

Of course, in the event that the Bank deemed it necessary to take regulatory action
in the payments system aspects of digital currencies, the international character
of such systems could place constraints on its ability to act unilaterally,
so any action might need to be suitably coordinated. One vehicle for coordination
would be through the Committee on Payments and Market Infrastructure (CPMI)
at the Bank for International Settlements, of which the Bank is a member. The
CPMI monitors developments in digital currencies.

Finally, we note that digital currencies have the potential to raise more immediate
concerns over issues relating to taxation, Anti-Money Laundering and Counter-Terrorism
Financing Rules and consumer protection. These are areas that are outside the
Bank's realm of expertise and responsibility.

We would now be happy to answer any questions from the Committee on the Bank's
submission.